Making Gifts this Year and Next

As we head into the last quarter of the year, many clients are thinking about making gifts to their family members. It can also be a good time to plan to make gifts in January of next year.

The federal gift tax annual exclusion allows you to gift a certain amount to a recipient each year without using any of your lifetime exemption amount. In 2022, the annual exclusion amount was $16,000, or $32,000 for a married couple choosing to split gifts. For 2023, the annual exclusion amount is estimated to increase to $17,000, or $34,000 for a married couple choosing to split gifts. For example, it is expected that a married couple with four children will be able to gift $136,000 ($34,000 to each child) in 2023 without using either of their estate and gift tax exemption amounts.

It is often advisable to make gifts larger than the annual exclusion, since in Washington and Oregon lifetime gifts completely escape state estate tax at death and there is no estate or gift tax in Idaho. For gifts over and above the annual exclusion amount, every US citizen and resident has a lifetime federal transfer tax exemption. The exemption is the amount of wealth a person can shelter from federal estate tax on transfers at the time of death or during lifetime. In 2022, this amount was $12,060,000 for each taxpayer, or $24,120,000 for a married couple. Due to inflation, on January 1, 2023, the unified exemption amount is estimated to increase to $12,920,000, or $25,840,000 for a married couple, meaning that each taxpayer may be able to transfer an additional $860,000 free of transfer tax liability beginning next year. It is important to note, however, that the current exemption amounts were put in place in 2017 and are currently scheduled to sunset at the end of 2025. If no legislative action is taken, the exemption amount will be reduced to $5,000,000 per taxpayer, or $10,000,000 for a married couple, indexed to inflation. Currently, if no tax law changes are made before January 1, 2026, the unified exemption amount will be likely be approximately $6,800,000 per person, or $13,600,000 for a married couple.

As stated above, larger gifts are often advisable from a tax perspective since they will escape Oregon or Washington estate tax and will shift the appreciation to the next generation for federal estate and gift tax purposes. While gifts over the annual exclusion require the filing of a gift tax return, they do not result in gift tax being paid by the donor (assuming the gifts are under the limits described above) and do not require tax reporting by the recipient when received. However, attention should be paid to the basis of the assets to be gifted. When you make a gift of high basis assets (or cash), there will be little or no capital gain when the assets are sold. But if you gift assets that have a low basis, it is good to be aware that your recipient will take your basis in these assets. While this may not be relevant if the assets are unlikely to be sold, if the recipient plans to sell, the capital gains tax paid after the sale may be greater than the Washington or Oregon estate tax savings.

In light of this potentially time-limited opportunity, individuals and families should work with their trusted advisors to determine whether any 2022 gifting, additional gifting in 2023, or making one large gift in 2023 would be advantageous for their situation.